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Q2 Comps, Profits Reveal Chink in Whole Foods' Armor

Organic and natural foods leader Whole Foods Market, Inc. yesterday posted a 27.6 percent jump in sales for the 12-week second quarter ended April 13, but comps for the quarter slid compared to the prior two quarters, inciting concern on Wall Street and prompting c.e.o. John Mackey to acknowledge his chain is feeling the economic squeeze like everyone else.

Overall sales were approximately $1.9 billion, the chain said. Comparable store sales increased 6.7 percent; and identical store sales, excluding four relocated stores and two major expansions, moved up 5.1 percent. This compared to comps of 9 percent in 2008's first quarter, and 8 percent in the fourth quarter of fiscal 2007.

"We are impacted by rising food costs as all food retailers are," said Mackey during a conference call. He emphasized that the chain continues to outperform rivals via "higher sales, comps, and sales per square foot than our public competitors, and the results in our core stores are strong."

Prompted by analysts' questions about the softening of its comp gains, Mackey said, "Our comps aren't quite as strong as they were in the first quarter, as they were perhaps a year ago, but they're still running ahead of food inflation." He also mused, "We don't know why our comps are high and we don't know when they go down low. We just make guesses. It's impossible to break it out with any true accuracy."

One thing was clear to Whole Foods: The impact of its Wild Oats acquisition dragged income down 13 percent in the quarter. Net income was approximately $40.0 million, and earnings per share were $0.29. The grocer estimated the negative impact on net income from the Wild Oats merger was approximately $8.6 million in the quarter.

Sales at the 62 Wild Oats stores in operation during the second quarter were $175.4 million, or 9.4 percent of total sales, and identical store sales growth was 5.4 percent, Whole Foods said. The company closed four Wild Oats stores subsequent to the end of the quarter.

"We have re-branded 27 of the Wild Oats stores to date, and we are excited about the notable improvements we have seen in the year-over-year sales increases at these stores, from 6 percent on average before re-branding to 12 percent after," said Mackey. "As with all of our acquisitions, integration is generally a two-year process. We have made substantial progress with Wild Oats so far, and we are confident that our upfront investments will drive improved sales this year and higher comparable store sales growth in fiscal year 2009 and beyond."

Whole Foods is maintaining its previously announced sales guidance for fiscal year 2008. On a 52-week to 52-week basis, it expects total sales growth of 25 percent to 30 percent and comparable store sales growth of 7.5 percent to 9.5 percent.

Including the impact of Wild Oats, it said it expects a moderation in the year-over-year declines in income before pre-opening and interest as a percentage of sales during the second half of the fiscal year compared to the first half.

Whole Foods opened eight stores through the second quarter and has opened one store thus far in the third quarter. Four additional stores are expected to open in the third quarter, including one Wild Oats store that closed for major renovations, and up to eight stores are expected to open in the fourth quarter.

The company currently operates 269 stores totaling 9.4 million square feet and has 89 stores in development totaling 4.6 million square feet. It expects to open 25 to 30 new stores in fiscal year 2009. Longer term, the company's goal is to reach $12 billion in sales in fiscal year 2010.